Trade binary options using engulfing candlestick strategies

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Engulfing Candlestick Analysis Method

Updated on: 6 January 2020

A form advanced binary options candlestick strategy is the engulfing binary options candlestick strategy. With the help of this strategy, traders will have the possibility to predict the movement of assets with a fairly large accuracy. After this they will be able to make the most accurate prediction on a binary options contract.

The engulfing candlestick binary options strategy is advanced in our opinion because it takes into consideration two candlesticks rather than just one as it’s in the case of doji candlesticks and pinbar candlesticks. Therefore, it is recommended to traders who already have an idea how candlestick technical analysis works.

Essentially, this strategy will enable traders to predict when a trend will change. By this we mean a reversal in the increase or decrease of the value of the asset. As you can see, being able to predict something like this can greatly influence your winning odds.

Read the article below in order to understand how the engulfing binary options candlestick strategy works.

What is the Engulfing Candlesticks Binary Options Strategy?

As explained in the introduction, the engulfing binary options candlestick strategy is a binary options strategy that will enable medium to advanced traders to predict when the direction in the value of an asset will reverse.

With this strategy, traders will be able to place much accurate bets and as such be able to substantially increase their overall winning odds. Read below in order to learn how this strategy works and how you can use it to your advantage.

How to use?

This strategy requires you to carefully watch the development of the candlesticks on a charting platform. Here, you will have to watch out for two candlesticks, which are side by side and fulfill the following conditions:

– The second candlestick moves into the opposite direction than the first one – The second candlestick is much larger than the first one

This strategy is called engulfing candlestick strategy because the second candlestick is “engulfing” the first one by being larger in the direction in which the second candlestick is moving. There are two kinds of candlesticks of this kind, which you can find below.

Bullish engulfing candlesticks

A bullish candlestick is an engulfing candle pattern where the first candlestick in the pattern is red while the second is green and larger than the red in the upper direction.

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If you see a pattern like this, the following will happen:

– The value of the asset will most likely increase from now on continually.

This is because the candlestick pattern denotes that a large number of traders have decided to buy the asset, meaning that it the value of the asset will increase shortly. This is shown by the fact that the green candle is larger than the red one, meaning that more traders are now buying than traders who were selling before (as shown by the red candlestick).

So, in this situation you should buy a binary options contract that predicts that the value of the asset will go up in the future. You can also buy one that predicts that the value of the asset will go down and bet against this prediction.

Bearish engulfing candlesticks

The second engulfing candlestick is when the first candle in the pattern is green while the second is red. The second candle is also larger than the first one at the bottom of the two sticks.

If you see one of these patterns, then the following will happen:

– The value of the asset will highly likely decrease continually from now on.

The reason for this is that the second red candle denotes than a very large number of traders have decided to suddenly sell the asset, leading to a reduction in price. The number of sellers is now also larger than the number of previous buyers.

Recap on candlesticks

In case you have no idea what candlesticks are, then read the following lines. Skip this segment in case you aren’t a total newcomer.

Candlesticks are charting indicators used for technical analysis in financial trading and binary options. They will reveal the direction of the movement of the assets, the velocity of the movement of the assets as well as the proportion of traders either buying or selling the asset.

A candlestick is made up of a real body and the two shadows. The real body is the red or green rectangular area in the middle. A green real body denotes an increase in the value of an asset while a red one denotes a decrease.

A long real body means that the value of an asset increased/decreased substantially during a very short time frame. A short real body means that the value of the asset barely moved during a short time frame,

A second element making up a candle is are the shadows. The shadows denote the proportion of traders either buying or selling an asset. If, for example, an upper shadow is very long, it means that a large number of traders have decided to buy the asset. However, if, for example, a lower shadow is very short, it means that a low number of people decided to sell the asset.

What Kind of Predictions Can you Make?

Now you might be wondering what kind of predictions you can make using engulfing candlesticks in binary options. As you could have read above, there are basically two candlesticks of this kind, so there are two scenarios. Below you find an example on both of them.

Bullish engulfing candlestick example

Imagine the following situation:

– You notice that the value of an asset was continually decreasing for the past few hours – Now you notice that the latest candle is a green candlestick that’s larger on the upper side than the preceding red candlestick.

In this situation you conclude the following:

– The value of the asset will most likely begin to increase in the future.

As such, you have two choices. The first one is to buy a binary options contract that predicts that the value of the asset will indeed increase. The second choice is to buy a contract that predicts that the value of the asset will decrease and bet against this prediction.

Bearish engulfing candlestick example

Imagine the following:

– The value of an asset was continually increasing the past few hours – Now you notice that the newest candlestick is a red one and its lower side is much larger than the lower side of the green one

Now, you will highly likely now that the following will happen:

– The value of the asset will most likely decrease in the future and will keep decreasing for a while.

Here, again you will have two choices to make. The first is to buy an option that predicts that the value of the asset will decrease. However, you may as well buy an option that predicts that the value of an asset will increase and bet against this prediction.

And it’s actually really this easy.

How accurate is it?

Now, the obvious question is how accurate this method actually is in binary options. The engulfing candlestick binary options strategy is not one of the most popular strategies, mainly because it involves two candlesticks instead of just one.

However, it can generate substantial winning rates of above 85%. This means that using this strategy, traders will be able to generate profits all the time, no matter what. The engulfing candlestick strategy works bets with the combination of other strategies.

If you know other strategies too, then you will be able to discover much more patterns and win much more than usual. This is essential if you want to win a lot because engulfing patterns are the least frequent patterns in financial trading.

So, feel free to check out our additional pages and articles that deal with other binary options candlestick strategies such as the pinbar candlestick strategy and the doji candlestick strategy.

Candlestick patterns trading strategies

MUST READ: Candlestick patterns – 21 easy patterns ( and what they mean )

Bullish engulfing pattern.

What is it?

Engulfing patterns happen when the real body of a price candle covers or engulfs the real body of one or more of the preceding candles.
The more candles that the engulfing candle covers the more powerful the following move will likely be.
There are two types. Bullish and bearish.
The bullish engulfing pattern signals a bullish rise ahead and the opposite is true for the bearish engulfing candle.
In the above chart I have circled the bullish engulfing candles which led to price rises immediately after.

How do I trade it?
Well, the bullish engulfing pattern is a precursor to a large upward move.
So, when you see an the engulfing candle taking shape you should wait for the following candle and then open your position.
Your stop should be placed at the low of the engulfing candle.

Bearish engulfing pattern.

What is it?
The bearish engulfing pattern signals a bearish price decline ahead.
In the above chart I have circled the bearish engulfing candles which led to price declines immediately after.
Again, the more candles that the engulfing candle covers the more powerful the following move will likely be.

How do I trade it?
It is the same principle as the bullish pattern, just the flip side of the coin!
The bearish engulfing pattern is also a precursor to a large decline.
So, when you see an the engulfing candle taking shape you should wait for the following candle and then open your position.
Your stop should be placed at the high of the engulfing candle.

Long shadow pattern.

What is it?
The ‘long shadow refers to the length of the line from the closing price on a candle to the high or low price of that particular candle.
The ‘shadow’ should be at least twice the length of the real body of the candle.
These shadows tend to occur at turning points.
And they tend to lead to large price moves!
How do I trade it?
As with the rest of the candle stick patterns, we wait for the long shadow candle to close and we place our trade at the open of the next candle.
Your stop should again be placed at the extreme high or low of the shadow candle and trailed to follow the trend.

Hammer patterns.

How do I trade it?
Its the same trick!
We wait for the long hammer candle to close and we place our trade at the open of the next candle.
Your stop should again be placed at the extreme escort istanbul high or low of the hammer candle.
and again trailed to follow the trend.

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Trading Binary Options with Candlesticks

Candlestick indicators are one of the most utilised tools in a trader’s chest.

They allow the trader to form a view on how the option is likely to expire, up or down.

When it comes to Binary Options, when the expiry time is set to the timeframe examined with the Candlesticks, trading becomes that much more profitable.

If you are slightly unfamiliar with the technicalities, you can read our refresher on Binary Option Basics.

If you are considering trading Binary Options with Candlesticks, then our candlestick strategies below are your best starting point.

What are Candlesticks?

Japanese Candlesticks (or just CandleSticks) are a graphical representation of key levels within a defined time period. These are the open, close, high and low. They are particularly helpful for traders who want to get an idea of volatility in a particular range.

From the image on the right, you can see that there is quite a bit of information that you can gather from the CandleStick. The candlesticks also differ in color and can either be green (white) and black (red).

Taking a look at the image, there are a number of characteristics of each candle. The difference between the open and the close is termed the “body” of the candle. If the candle closed higher (close above open) then the body is green. The opposite can be said for the candle that closes lower with the red body.

The short lines that are above and below the candle represent the range which the price traded throughout the period and are the difference between the high / low and the open / close levels.

When trading binary options with candlesticks, the trader tries to identify unique individual candles as well as formations of a range of different candles.

In general, large green candles are bullish indicators and large red ones are bearish. This is based on the principle of momentum in trading.

However, the binary options trader will not only examine the individual candle but will take a look at candlestick formations.

Candlestick Formations

Before the binary options trader can use a number of different strategies with CandleSticks, he has to become aware of the various formations that apply to candle sticks. These give a lot of information about where the asset is going and hence how the next candle will perform.

Formations are usually a collection of more than two candles. They are usually also used in conjunction with other technical indicators such as trends, volume and other trading signals. What is also important to note is that the formations can be viewed over any time period from a minute up to a number of days. When trading binary options with candlesticks, formations are an essential part to any strategy We will look at some of the most well known CandleStick formations.

Engulfing CandleSticks

When a candlestick formation is engulfing, the one candle is completely “engulfed” by the proceeding candlestick. The candle is usually engulfed by a candle that is a different color than the original candle.

When a small red candle is engulfed by a much larger green candle then this is a bullish engulfing candle. This is given on the left of the image. On the other hand, a Bearish engulfing pattern occurs when a small green candle is completely engulfed by a large red candle. This is on the right of the image.

Taking a look at the Bullish engulfing pattern, this indicates that the price has attempted to move down but has found some support and buying volume. Depending where it is on the trend, it could either be an indication of a continuation or a reversal.

The opposite can be said for the Bearish Engulfing Candle. It is an indication that either an uptrend is about to reverse or the downtrend is likely to continue.

Morning and Evening Stars

Morning / Evening stars are usually only presented in times of market illiquidity and hence “gapping” in the price. This is usually at times like overnight or over the weekend.

In the image, the morning star is on the left. The way that the trader can interpret the morning star is that initially, the sellers are in control of the market. However, the second candle gives a slight indication of a reversal to a bullish trend. Indeed, the large green candle confirms this.

The evening star has the same explanation. Initially, the buyers are in control. However, it appears as if the market is turning bearish. This is confirmed by the last candle.

Harami

Harami looks like the opposite candle to an engulfing one. In this, we have a large candle (either red or green) that is followed by a much smaller candle in body that is overshadowed by the initial candle.

In the image on the left is the bullish Harami. Although the Harami is not as convincing as the engulfing pattern, it is still a good indication of any possible reversal in the preceding trend. The Bearish Harami is seen on the right of the image and should also be monitored as a possible example of a reversal from an uptrend.

Three Method Formations

Comprised of 5 candles, a three method formation can either be bullish or bearish. The three method formation is usually identified by the three smaller candles of a different color that are within the range of the bigger candles.

In the image, on the left, we have the Bullish three method formation. The interpretation of this formation is that initially the buyers were in control and pushed the price up. However, the sellers are trying to take over the bullish trend. However, the buyers eventually overwhelm the sellers and the trend continues up.

The same interpretation on the downside can be gleaned from the Bearish Three Method formation that is on the right of the image.

Falling / Rising Windows

Similar to the Morning and Evening stars, falling and rising windows usually occur in times of market illiquidity. This is because there is a large gap down or up between the candles.

However, with the falling and rising windows the gap is way more pronounced as the candle opens far away from the open / close of the previous candle.

In the image we have the falling window on the left. It can be a sign of a Bearish Continuation pattern. The Rising Window on the right is a strong bullish indicator and should be a bullish sign of a potential rising trend.

Using CandleSticks with Binary Options

When trading Binary Options with Candlestick analysis, you will usually look to use expiry times that correspond to the timeframe of the candlestick. The trader will then enter either a CALL or a PUT option at the beginning of the next candle. Hence, if the trader is of the view that the candle will end up down (red) he will enter a PUT and vice versa for CALL.

Hence, given the candle stick pattern that the trader has observed, they have a fairly good idea about where the next candle will end up. We will go over a few examples of trading binary options with candlesticks.

Example 1: Spot Gold Candlesticks

In the image on the right, we have the Spot price of gold plotted on five minute candles. Hence, the trader should have a five minute binary option expiry selected.

As the trader can observe, there is a large red candle that is followed by a smaller green candle. This green candle is completely within the bounds of the larger red candle.

This is a Bullish Harami and it is a bullish indicator. The trader can therefore enter a 5 minute CALL option at the start of the next candle. This would have resulted in a profit on the expiry of the option.

Example 2: GBPJPY Candlesticks

Taking a look at the 5 minute candles of the Yen and GBP cross, we can see that there was a large gap down during the weekend as the GBP depreciated.

This is a falling window as the price has opened considerably lower and has also closed much lower. This is a Bearish indicator and the trader should enter a PUT option on the open of the new candle.

On the expiry of the option, the close was lower than the open and the trader would have made a profit.

Example 3: FTSE 100 Candlesticks

Candlestick analysis done with equity indexes can be equally effective. Taking a look at the 5 minute candlestick chart of the FTSE 100, we can see a large red candle that is followed by three increasing green candles and another large red candle.

This is a Bearish three method formation. On the open on the next candle, the trader should look to enter a 5 minute PUT option on the FTSE 100.

Given that the formation is a bearish indicator, the trader will likely have a trade that will end up closing lower and hence in the money. The trader can then profit from the fall.

Example 4: USDCAD Candlesticks

Sometimes, a candlestick formation can be a combination of more than one. Taking a look at the chart with the Canadian and US dollar cross, we can see that there is the tell-tale sign of Three White Knights.

However, the third white knight is considerably higher than the second one. This is a rising window and is also a bullish indicator.

Hence, the trader can be more certain of a positive outcome in the next candle. The trader will therefore enter a 10 minute CALL option on GBPJPY.

As the momentum from the three white knights and rising window takes hold, the option will expire in the money and the trader will profit.

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